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Rational and behavioral motives to trade: Evidence from reinvestment of dividends and tender offer proceeds

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  • Kaustia, Markku
  • Rantapuska, Elias

Abstract

We provide evidence of households’ stock market trading in response to clearly identifiable positive cash flow shocks: dividend payments and tender offer proceeds. Transaction cost motives appear important, and there is some support for rational portfolio rebalancing and life cycle considerations as well. Households’ tendency to reinvest is low, even for large and unexpected dividend payments. This is consistent with a default choice bias, and is not due to dividend clientele effects. Reinvestment of tender offer proceeds is significantly higher, controlling for other important factors. This is consistent with mental accounting, i.e., cash flows from different sources are treated differently.

Suggested Citation

  • Kaustia, Markku & Rantapuska, Elias, 2012. "Rational and behavioral motives to trade: Evidence from reinvestment of dividends and tender offer proceeds," Journal of Banking & Finance, Elsevier, vol. 36(8), pages 2366-2378.
  • Handle: RePEc:eee:jbfina:v:36:y:2012:i:8:p:2366-2378
    DOI: 10.1016/j.jbankfin.2012.04.015
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    Cited by:

    1. Harris, Lawrence E. & Hartzmark, Samuel M. & Solomon, David H., 2015. "Juicing the dividend yield: Mutual funds and the demand for dividends," Journal of Financial Economics, Elsevier, vol. 116(3), pages 433-451.
    2. Steffen Meyer & Michaela Pagel, 2019. "Fully Closed: Individual Responses to Realized Gains and Losses," NBER Working Papers 25542, National Bureau of Economic Research, Inc.
    3. Kent Daniel & Lorenzo Garlappi & Kairong Xiao, 2018. "Monetary Policy and Reaching for Income," NBER Working Papers 25344, National Bureau of Economic Research, Inc.
    4. Bräuer, Konstantin & Hackethal, Andreas & Hanspal, Tobin, 2020. "Consuming dividends," SAFE Working Paper Series 280, Leibniz Institute for Financial Research SAFE.

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    More about this item

    Keywords

    Household finance; Trading behavior; Dividend; Reinvestment;
    All these keywords.

    JEL classification:

    • D14 - Microeconomics - - Household Behavior - - - Household Saving; Personal Finance
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G35 - Financial Economics - - Corporate Finance and Governance - - - Payout Policy

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